Government procurement contracts for construction projects such as airports, dams, and highways generate immense opportunities for bribes, kickbacks, and other payoffs. In this article, Donald Strombom, a former chief of procurement for the World Bank, looks at the wasting effects of corruption on development and offers a sober assessment of the difficulties in dealing with the problem. Strombom is currently president of IDBC, a consulting firm that advises and trains its clients to win international contracts by competing intelligently and effectively within the rules -- not by corrupt practices.

Corruption takes many forms -- the petty bureaucratic variety, corruption in police and the judiciary, corruption in the election process, to name just a few. But probably none is more pervasive or has higher costs than corruption related to procurement: government buying of goods, works, and services. The reasons are simple. If one sets aside government salaries and social benefits, procurement typically accounts for the largest share of public expenditures at all levels of government. Both the overall amounts and individual contract amounts are huge, and they offer correspondingly large opportunities for bribes, kickbacks, and other payoffs. The potential reward for a single contract directed to the right winner can exceed the legitimate lifetime salary earnings of a decision-maker. The temptations are enormous and, in too many cases, the risks of punishment are relatively small.

Public works construction projects -- airports, dams, highways, subways, water systems -- traditionally have provided the biggest, most publicized, and most dramatic cases of corruption worldwide. Other prime targets are "big ticket" equipment items -- bus fleets, construction equipment, airplanes, turbines, and generators -- as well as simple items like office supplies, pharmaceuticals, textbooks, and uniforms that are purchased in huge quantities year after year.

Corruption practices adapt to changing trends, however. The growing use of external consultants and the increasing outsourcing of contracts for maintenance and other services formerly provided by in-house staff are just two examples of new opportunities for corruption. Perhaps the ripest new opportunity of all, because of the general lack of familiarity with what it involves and the numerous high-value contracts, is in the information technology field. The most spectacular, attention-catching cases are those in which millions of dollars change hands over the award of a single contract or in which governments and political parties fall because of bribery scandals brought out into the open.

It would be a serious mistake to think that corruption occurs only in these big, high-visibility cases. One could argue, in fact, that these are the more easily monitored and controlled situations -- if the will and the means exist to do so. The more difficult corruption to deal with is that which is ingrained in the culture and permeates entire systems of government procurement, from the lowest-level contract officer and inspector in the field to the ministers or higher who have final authority for contract approvals.

FORMS OF CORRUPTION

How does corruption occur in procurement? The popular image is of a would-be contractor arriving in a minister's or a mayor's office with a suitcase full of cash, just before a critical decision is made about a contract award -- an amusing caricature, but an awkward method and hardly in keeping with modern technology. The reality is more likely to be an electronic deposit in a foreign account, corporate stock shares, an elite school scholarship for a son or daughter. The fact that the recipient may use the proceeds for a worthy cause makes combating corruption that much harder. But the direct contractor-client payoff for a contract award is only one of many possible scenarios, and not necessarily the most common or most costly form of corruption.

Bribery often occurs at a much earlier stage in the procurement process: to get a firm included on a restricted list of bidders, for example, or to encourage a client to write specifications in such a way that the winning bidder is a foregone conclusion. Or corruption may be carried out entirely among competing firms, through collusion and bid-rigging, without the client being involved or even aware it is happening. Firms may agree in advance who will submit competitive bids and at what prices, who will win, and how the profits will be shared. To illustrate how complicated it can be to eliminate corruption, the prequalification of bidders by a client to ensure that only qualified and financially sound firms participate in bidding competition quite unintentionally makes it easier for dishonest bidders to collude, since all prequalified bidders are announced in advance.

Quite likely the most extensive and costly corruption occurs after contracts have been awarded. Corruption is not a charitable game; "winners" have every intention of recovering their bribery costs, and they have a variety of ways to do so. The first stage, especially in collusive bidding, is by inflating their bid prices. Further cost recovery can be achieved during contract performance by over-invoicing for quantities of goods delivered or work performed, reducing the quality of materials used for construction or delivering cheaper models of goods, and obtaining contract change orders to increase the amounts of goods sold or works performed at overpriced unit costs. Again, corruption in the post-award stage of a contract may be with the knowledge and consent of at least some parties in the client's organization, or it may be through well-concealed initiatives of the contractor alone.

In fairness to contractors, many of the above practices are motivated by attempts to hedge against perceived uncertainties and risks in clients' systems of contracting, rather than deliberate corruption. In that sense, better risk management and contracting terms may be part of an approach to reducing "corrupt" practices.

The debate about who is responsible for corruption in procurement is largely irrelevant, for there is no single pattern. Sometimes the initiative clearly comes from the client in the form of explicit demands by a director for a specified percentage of the bid price or from inspectors who "certify" incorrect quantities for payments to contractors. (This highlights one difficulty in fighting corruption: clients are not monolithic, but rather are many different individuals or groups looking out for their own interests.) In other cases the bidder is first to offer inducements. In most cases there is some degree of complicity between client and bidder/contractor. In all cases, the taxpayer and public at large are the losers.

THE COSTS OF CORRUPTION

What are the real costs of corruption in procurement? One way to measure this is to compare actual prices of similar goods and services delivered under different conditions; for example, in contracts awarded through direct negotiations or restricted bidding in comparison with open and apparently properly conducted competitive bidding. (This does not mean that contracts awarded by direct negotiations or restricted bidding are never appropriate; in some situations these are preferred procedures. The comparisons should be in cases where these are not likely to be the most economical or efficient methods.) Price differentials on the order of 20 to 30 percent are commonly found, and sometimes substantially more. These comparisons are rough approximations at best.

Some would argue that it is virtually impossible to find a reference case that is completely free from the influence of corrupt practices, and that the true cost differences are therefore understated. Conservatively, where corruption is systemic, it probably adds at least 20 to 25 percent to the costs of government procurement. Following a corruption scandal in Milan several years ago, which led to many criminal indictments and closer scrutiny of public contracting practices, unit costs of major works projects fell by more than 50 percent, according to an IMF working paper, "Corruption, Public Investment and Growth," by Vito Tanzi and Hamid Davoodi. With annual purchasing budgets running in the billions or hundreds of millions of dollars, this begins to involve "real money."

If costs of this magnitude are at stake, why isn't something being done to correct the waste? Some rationalize inaction on corruption by the fact that "it's always been there; it's just part of the cost of doing business." There are those who argue that it isn't really a "problem" because corruption produces economic benefits by "greasing the wheels" of inefficient bureaucracies: how else to get prompt customs clearances, expedite contract payments, and the like? And the reality is that bribery of foreign officials, for example, is not illegal in many countries; until very recently, only the United States had a strong and enforced foreign corrupt practices law. More than anything else, it has probably been a combination of opposition from strong vested interests that benefit from continued corruption and a lack of public appreciation that corrupt practices and their costs can certainly be reduced, even if never completely eliminated.

The good news is that significant steps are being taken to make it clear that corruption is not an acceptable part of public procurement. Various organizations operating on different fronts are mounting a campaign to create public awareness and citizen empowerment, broaden the use of sound procurement practices, and penalize the violators of established norms.

ELEMENTS OF SOUND PUBLIC PROCUREMENT SYSTEMS

What are the characteristics of a good public procurement system? It should be able to deliver the goods and services needed by government to perform its functions in a timely manner and at fair prices; in other words, it should be economical and efficient. Contracting opportunities should be widely publicized. Awards should be made to those who are able to meet the stated needs and required standards and who make the best offers. Rules should be clear and fair, the process transparent, and the results predictable. Underlying the entire system should be a notion that public officials are accountable for the proper use of public funds and should not enrich themselves in the process. Unfortunately, all of these concepts are not yet universally accepted or practiced, and therein lies one of the excuses or causes for corruption.

Wide international experience shows that these desirable characteristics can best be achieved through a system that is based on appropriately designed methods of competition among qualified suppliers of goods and services. There is also broad agreement about the main elements in a competitive bidding process; namely, it should feature:

Public notification of bidding opportunities;

Documents that clearly set out the needs, describe the bidding process and contract terms and conditions, and give the criteria for choosing the winner;

Submission of secret sealed bids that are opened in the presence of the bidders at a specified time and place;

Impartial evaluation and comparison of bids by competent evaluators without influence or interference by bidders or other parties;

Award of the contract to the bidder complying with all requirements and offering the best bid, as defined by the published selection criteria.

Governments in many countries and at all levels have developed and successfully used procurement procedures built around these basic elements. The major multilateral development banks (MDBs) -- the World Bank, the African, Asian and Inter-American development banks, the European Bank for Reconstruction and Development, and others -- have all adopted rules for procurement that apply to projects they finance. In order to use funds from their loans, borrowers must follow the prescribed rules; the banks supervise their loans to ensure the rules are properly applied. Failure to follow the rules may result in cancellation of the loans.

In 1993, the United Nations Commission on International Trade Law (UNCITRAL) adopted a Model Law on Procurement of Goods and Construction as a guide for countries to follow for the evaluation and modernization of their procurement laws and practices. This model law was particularly intended to help developing countries and countries in transition from planned to market economies to avoid inefficiency, ineffectiveness, and abuse in public procurement as a result of an inadequate legislative framework. It embodied virtually all of the same principles that the MDBs had built into their procurement rules, as well as administrative and judicial processes for review of procurement decisions, providing an important step toward the development of uniform international rules and procedures.

The most significant accomplishment in this regard was the development, as an integral part of the General Agreement on Trade and Tariffs (GATT) negotiations, of the Agreement on Government Procurement, which was signed in Marrakesh in 1994. This agreement, which entered into force for signature countries in January 1996, is more commonly identified as the World Trade Organization's (WTO) procurement rules. Government members of the WTO are encouraged to accede to this agreement, although this is not a condition for membership. Whether or not there is formal country accession to the agreement, the rules and procedures it contains become the closest thing there is to a universal standard for good practices.

In parallel developments, member countries of the Organization for Economic Cooperation and Development (OECD) joined in a concerted effort to promote the adoption of national laws, similar in nature to the U.S. Foreign Corrupt Practices Act, that make bribery of government officials, whether at home or abroad, and other forms of corruption in procurement criminal offenses subject to severe punishment. In 1996, the Organization of American States approved an Inter-American Convention Against Corruption. That same year, the International Chamber of Commerce proposed anti-corruption rules of conduct for corporations and corresponding actions for governments. Suddenly, much of the official and corporate world seems to have decided something should be done about corruption.

Transparency International has played a pivotal role by creating public awareness of the scale of the problem and organizing grassroots efforts to combat corruption. Their influence has been a driving force behind many of the reform efforts under way around the world.

Do these converging positive steps mean that the end of corruption in procurement is in sight? Regrettably, no, for while the rules bring order and sound principles to the process, determined corrupters can still find ways around them and get their payoffs. The MDBs, for example, spend considerable staff time and administrative budget to supervise each lending operation, and particularly to monitor and approve procurement procedures and decisions. Yet recent disclosures suggest that 20 percent or more of these funds in some countries may be lost through "leakage," a euphemism for moneys misdirected by corrupt practices into officials' pockets and personal bank accounts.

Even before these estimates became public, the international financing institutions had taken steps to strengthen their hands in combating corruption. They expanded their procurement rules to include explicit prohibitions against fraud and corruption and to impose strict sanctions in cases in which these practices were discovered: denying contract awards to violators, prohibiting their participation in future bidding for contracts financed by the banks, refusing to pay for improperly awarded contracts, and canceling entire loans in extreme cases. In addition to their normal project supervision and financial audit requirements, the MDBs initiated procurement audits by external companies to determine whether borrowers were strictly observing their rules and procedures.

Along with this tightening of project monitoring and supervision, MDBs are taking parallel steps to ensure that borrowers really understand and are able to apply sound procurement procedures correctly. The World Bank, for example, now requires regular assessments of its borrowers' procurement rules and their organizational capacity to implement them correctly. Conformity with accepted practices and evidence of corruption are two key areas for investigation. These country procurement assessments, conducted in collaboration with the borrower country, become the foundations for designing and funding technical assistance programs where needed to build professional competence.

STEPPING UP THE FIGHT

Experience of the international financing institutions and others demonstrates one of the truisms in procurement: corruption is not stopped or curtailed simply by having sound rules. It is increasingly clear that other coordinated efforts are needed to make a significant impact on corrupt practices. Everyone must be made aware that violations of the rules are illegal acts that will be discovered and punished. This creates the need for effective monitoring and audit systems and for enforcement agencies that have the will and ability to take actions against violators, regardless of their position. It requires a judiciary system that is not corruptible and is able to make and enforce convictions. Cadres of procurement professionals must be developed who are insulated from political interference in contract award decisions. Temptations for these people to engage in corrupt practices themselves need to be reduced by paying them a reasonable wage that compensates them for their honesty. In short, corruption abatement may require nothing less than a complete overhaul of civil service and governance systems.

Creative thinking and innovative approaches are needed in the fight against corruption. One promising development is the movement to inject transparency into the procurement process by citizen groups that are not amused by government officials getting rich at their expense. Efforts to date are largely concerned with recruiting like-minded citizens and publicizing cases of corruption, but these groups often lack systematic ways to get more deeply into the reform process. Means should be devised for them, as true stakeholders, to take a more active role in monitoring and verifying that procurement processes are not corrupted. The challenge is how to engage them in meaningful ways without corrupting them as well.

The complexity of the fight against corruption should not be taken as an excuse for doing nothing. Many public bodies have already made notable progress in reducing corruption, and enough experience has been gained to point with some assurance to the kinds of measures that are needed and will work. Public reaction against corruption has probably never been stronger, partly because it becomes increasingly clear that the public is the big loser if corruption continues.

There is no better time to mobilize forces in a serious effort to take corruption out of procurement. But reforms must be approached with realistic expectations about how much time and resources will be required. Lasting results will take years to achieve, and sustained efforts must be on a scale commensurate with the problem. It would be particularly tragic if good intentions are backed up by only halfhearted, quick-fix measures that allow corruption in procurement to continue unabated and discourage reformers.